Corporate Boards: Time to Step Up

Federal civil and criminal enforcement against companies is at an unprecedented level. I have repeated this over and over.

In the face of this aggressive enforcement environment, it is time for corporate boards to step up to the plate. As each new scandal is reported, the question always comes up – where was the board? Why didn’t they intervene and fix the problem?

Directors need to act and need to do so now. The baseline standard for corporate boards has risen to a new level. The sooner board members acknowledge and react, the sooner companies will comply and avoid damaging enforcement actions. Scandal after scandal means that something has to be done – corporate governance across the board has to improve.

It is frustrating to watch the continuing new headlines of corporate scandals. Corporate boards consist of honest and ethical leaders who know what they need to do.

The risk environment has changed in the last few years. Corporate governance reform, disclosure obligations, shareholder activism, enforcement of anti-corruption laws and trade sanctions, claw-back suits, cybercrime and climate change have combined to prod board members to think and act proactively.

New risks have created new opportunities for some businesses, and the board has to wisely guide the company to balance risks and opportunities. The board has to establish a clear relationship with senior management: communication between the board and management has to be fulsome; lines of responsibilities and reporting obligations have to be enhanced.

Too many companies rely on “policies and procedures” and then sit back and expect the system to work. That is a recipe for disaster. Corporate governance is more about personal relationships and human interactions than about policies and procedures. Human interactions, compatibility and responsibility are more important than policies and procedures which read like a menu for efficiency.

Risk analysis focuses too much on the short term. Directors and senior management focus too often on quarterly results while giving little attention to long term risk and planning. In addition, risk analysis tends to focus on the impact on the company itself rather than assessing the impact on the broader competitive market. Risk and its impact have to be assessed in relation to existing and potential competitors, not solely on the company itself.

Risk assessment requires directors to develop a risk “appetite” and tolerance in the context of the overall business strategy. This is a must for directors, and all too often they are deficient. This is where corporate board reform is needed most – risk has to be analyzed, risk assessments have to be conducted and strategies have to be implemented.

Companies need to step up and tackle this issue. Inertia has to be avoided. Proactive and imaginative leadership is the new frontier and the companies which embrace these new strategies will succeed – I hate to think what will happen to companies that cling to the past and inadequate strategies.